2021 (10) TMI 1403 - AT - Income Tax

Disallowance made of provision of stock obsolescence being charged to the profit and loss account - HELD THAT - Since the issue already stands adjudicated as above in the preceding assessment year, A.Y. 2005-06 2021 (7) TMI 1408 - ITAT CHANDIGARH the decision rendered therein will apply to the issue in all the remaining years concerned wherein as held that claim of the assessee as fully justified vis a vis write off of vaccines since undoubtedly such vaccines were not capable of being used beyond expiry period and had no realizable value thereafter. The assessee has been able to establish documentarily the fact of write off of the said product and the Revenue has not proved anything to the contrary. For the reasons stated above in the context of write off of vaccines we see no reason to disallow the claim of the assessee. Moreover identical claim of the assessee, we have noted, was allowed by the ITAT in identical facts and circumstances in A.Y 2003-04. The claim of the assessee to write off of toothbrush also is therefore allowed Accordingly, the issues of disallowance of provision of stock obsolescence stands decided in favour of the assessee. Disallowance of 1/3rd of the expenditure on advertisement and promotion, holding that it results in promotion of brand name owned by the foreign company - HELD THAT - Since the issue already stands adjudicated as above in the preceding assessment years, A.Y. 2005-06 2006-07 2021 (7) TMI 1408 - ITAT CHANDIGARH as held that it cannot simply be derived from the fact that assessee has incurred huge expenses on advertisement and sale promotion of products the brand of which belonged to another entity, considering the clear distinction in the end objective of the said expenses and the assessee consistently claiming that it had acquired the exclusive license to manufacture and sell the products in India and thus being the sole user of the brand name in India. These contentions of the assessee have remained uncontroverted. The entire benefit, in such circumstances, inured to the assessee alone as it alone was operating in the Indian market. Benefit if any to the AE was only incidental. And on account of such incidental benefit accruing to a third party it cannot be said that the expense was not wholly and exclusively for the benefit of the assessee. As long as the objective /purpose for incurring an expenditure is to benefit the assessee solely, the expenditure can be said to be incurred wholly and exclusively for the benefit of the assessee. Any incidental benefit accruing to a third party on account of the same, being beyond the control of the assessee, does not dilute the character of the expense. No reason or basis therefore for holding a part of the expense as pertaining to brand building - Thus the decision rendered therein will apply to the issues in all the remaining years concerned. Accordingly, the issues of disallowance of 1/3rd of advertisement and promotion expenses stands decided in favour of the assessee. Disallowance of purchase of vaccine of GlaxoSmithkline Biological S.A. u/s 40(a)i) - HELD THAT - Since the issue already stands adjudicated as above in the preceding assessment years, A.Y. 2005-06 2006-07 2021 (7) TMI 1408 - ITAT CHANDIGARH the decision rendered therein will apply to the issues in all the remaining years concerned. Accordingly, the issues of Disallowance of purchase of vaccine of GlaxoSmithkline Biological S.A. u/s 40(a)i) of the Act stands allowed for statistical purposes. Nature of expenditure - Disallowance of Product Development Expenses in relation to pre-launch of product being capital in nature - HELD THAT - Since the issue already stands adjudicated as above in the preceding assessment year, A.Y. 2006-07, the decision rendered therein will apply to the issues in all the remaining years concerned. Accordingly, the issue of Disallowance of Product Development Expenses in relation to pre-launch of product, being capital in nature stands allowed for statistical purposes. Disallowance of market research expenses incurred on market surveys, market research being capital in nature - HELD THAT - The expenditure incurred by the assessee on market research is merely for maintaining its profit earning ability and does not enhance the same. It is an expenditure which is incurred by the industry segment to which the assessee belongs so as to remain relevant and competitive in the said segment. By no stretch of imagination, the impugned expenditure, therefore, can be said to be capital in nature. The benefit, though made may be derived for a few years but is definitely not on capital account but on the contrary is on a revenue account to maintain its profitability only and not by way of enhancing it. The decision of the ITAT in the case of GlaxoSmithKline Consumer Healthcare Ltd. cited before us strengthens the case of the assessee wherein product development expenses which were found to have been incurred not on capital account but on revenue account, though giving enduring benefit in future, were held to be revenue in nature and hence allowable. Disallowance of market research expense is directed to be deleted and we hold that the assessee is entitled to claim the same as revenue in nature. The assessee has alternately pleaded for allowance of depreciation which is of no relevance since the entire claim of expenses has been allowed treating it as revenue in nature - Decided in favour of assessee. Disallowance of post retirement medical benefit holding this expenditure as being in the nature of contingent liability - HELD THAT - As gone through the orders of the ITAT in the case of GlaxoSmithKline Consumer Healthcare Ltd.(supra) and have noted that the issue of allowability of provision created for meeting medical expenses of the employees post retirement had been adjudicated in the said case wherein the ITAT had allowed the said provision on noting that it had been created on scientific basis by actuary in terms of and recognizing the scheme of employment and also the Accounting Standard-15 issued by the ICAI in this regard. Considering the same, the ITAT had held that the said provision could not be, therefore, said to be contingent in nature and was duly allowable, being recognized method of accounting. In the impugned case also, we find, that the assessee had claimed the provision, valued by an actuary, created in terms of the scheme of employment and the Accounting Standard-15 of the ICAI, which facts have not been controverted by the revenue before us. - Decided in favour of assessee. Disallowance of claiming CENVAT recoverable holding that expenditure to be not in the nature of trading expenditure - assessee had written off service tax recoverable which was not allowed by the Revenue holding that it pertained to earlier years and could not also be treated as bad debt - HELD THAT - CENVAT Credits represented cost of services availed, which was not claimed in the relevant years since they were eligible to be set off against output service tax to be paid by the assessee. On this claim of set off being judicially held to be not allowable, we agree with the assessee, the impugned CENVAT Credits partook the character of cost of services and did so in the year in which the order holding them as not eligible for setoff against output tax, was passed. Till then they merely represented asset by way of service tax credit available on account of the same. In view of the same, we find merit in the claim of the assessee that the write off of cenvat credit recoverable was allowable as revenue expenditure in the year written off and the disallowance so made by the revenue authorities, holding them to be non trading in nature, we hold is not in accordance with law and is directed to be deleted. Decided in favour of the assessee. Disallowance of provision of Market Claims on account of the assessee having failed to establish the nature of liability - HELD THAT - Assessee has contended that it has incurred liability on account of VAT claims to be made by dealers which is to be discharged in the subsequent years, but, we find, no documentary evidence in this regard has been filed to substantiate its claim. In the absence of the same, we fail to understand how the liability arose in the impugned year or could be said to be present obligation of the assessee even though it was required to be discharged in future years. The facts regarding the claim itself are not clear and therefore, we are not inclined to agree with the contention of the assessee. However, the alternate claim of the assessee of reducing the said provision reversed in subsequent years from its taxable income is justifiable and the revenue authorities are directed to allow the same in accordance with law. Decided against assessee. Education cess falls within the scope of amounts not allowed as deduction u/s 40(a)(ii) Adjustment made on account of interest on receivable allegedly recharacterizing as on secured loans - treatment of the delayed payment of receivables as international transactions as defined u/s 92B - Determination of arms length price adjustment be made to the income of the assessee in relation to the said transaction - HELD THAT - As noted from the order of Kusum Healthcare Pvt. Ltd. 2015 (4) TMI 180 - ITAT DELHI that it has been held that the delay in recovery of receivables would have an impact on the working capital of the assessee which also needs to be studied. In the decision of the ITAT in the case of Kusum Healthcare Pvt. Ltd relied upon by assessee before us, we have noted that the adjustment on account of outstanding receivables was deleted holding that the working capital adjustment would take into account the impact of delayed recovery of debtors as also any account payable mechanism adopted by the assessee to balance the delayed realization. It was, therefore, held that if the operating profit margin of the assessee are higher than the operating profit margin of comparable cases after working capital adjustment, then no adjustment on account of realization of trade receipts is required. We restore the issue of treating the accounts receivables as international transactions and bench marking the same for the purpose of adjustment to be made to the income of the assessee, to the TPO to determine the same afresh in accordance with law. Transfer Pricing Adjustment in relation to export of goods - assessee s contention of no adjustment to be made on account of the end purpose of the transaction of sale of goods to its AE being philanthropic - HELD THAT - No merit in the same for the reason that the commercial intention in the transaction between the assessee and its AE is an admitted fact, the assessee having charged a margin of 9% approximately on the cost incurred by it. When there is an admitted commercial intent in the transaction, it should ideally be, therefore, then at arms length only. The subsequent action of the AE of using the product/goods for philanthropic purpose cannot have any effect considering the admitted commercial transaction between the assessee and its AE. Comparable selection - We consider it fit to restore the issue back to the TPO for reconsideration of the contention of the assessee regarding exclusion of certain comparables from the list of comparables selected by the TPO. The TPO is directed to pass a speaking order detailing the reasons for rejecting the above comparables as pointed out by the assessee and thereafter adjudicate the issue in accordance with law. Needless to add the assessee be granted due opportunity of hearing in this regard. This issue therefore, is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of provision for stock obsolescence.
2. Disallowance of 1/3rd of the expenditure on advertisement and promotion.
3. Disallowance of purchase of vaccine u/s 40(a)(i) of the Act.
4. Disallowance of Product Development Expenses.
5. Disallowance of market research expenses.
6. Disallowance of post-retirement medical benefit.
7. Disallowance of CENVAT recoverable.
8. Disallowance of provision for market claims.
9. Claim of surcharge and education cess.
10. Adjustment on account of interest on receivables.
11. Transfer Pricing Adjustment in relation to export of goods.

Detailed Analysis:

Issue 1: Disallowance of Provision for Stock Obsolescence
The Tribunal noted that the issue was identical to the one adjudicated in the assessee's appeal for A.Y. 2005-06. The Tribunal found that the assessee had provided evidence for the write-off of stock, including emails and stock write-off sheets. The Tribunal held that the claim could not be denied for want of further evidence and allowed the claim, stating that the write-off of vaccines nearing expiry and Aquafresh toothbrushes was justified. Consequently, the disallowance of provision for stock obsolescence was decided in favor of the assessee.

Issue 2: Disallowance of 1/3rd of the Expenditure on Advertisement and Promotion
The Tribunal found that the issue was identical to the one adjudicated in the assessee's appeals for A.Y. 2005-06 and 2006-07. The Tribunal held that the Revenue had not established that the advertisement expenses benefited the parent AE. The Tribunal emphasized the distinction between brand building and advertising & marketing, stating that the entire benefit inured to the assessee alone. The Tribunal directed the deletion of the disallowance made on account of brand building expenses, deciding the issue in favor of the assessee.

Issue 3: Disallowance of Purchase of Vaccine u/s 40(a)(i) of the Act
The Tribunal found that the issue was identical to the one adjudicated in the assessee's appeals for A.Y. 2005-06 and 2006-07. The Tribunal noted that the AO's findings were based on data extracted from websites and not on relevant facts. The Tribunal restored the issue back to the AO for adjudication afresh, directing the AO to consider all factual and legal contentions raised by the assessee. The issue was allowed for statistical purposes.

Issue 4: Disallowance of Product Development Expenses
The Tribunal found that the issue was identical to the one adjudicated in the assessee's appeal for A.Y. 2006-07. The Tribunal restored the issue back to the AO for adjudication afresh, directing the AO to examine the nature and impact of the expenses vis-à-vis the existing business of the assessee. The issue was allowed for statistical purposes.

Issue 5: Disallowance of Market Research Expenses
The Tribunal noted that the issue was covered by the order of the Tribunal in the case of GlaxoSmithKline Consumer Healthcare Ltd. The Tribunal held that the market research expenses were revenue in nature, incurred to remain competitive in the market. The Tribunal directed the deletion of the disallowance, deciding the issue in favor of the assessee.

Issue 6: Disallowance of Post-Retirement Medical Benefit
The Tribunal noted that the issue was covered by the order of the Tribunal in the case of GlaxoSmithKline Consumer Healthcare Ltd. The Tribunal held that the provision for post-retirement medical benefits, valued by an actuary and created in terms of the scheme of employment and Accounting Standard-15, was an allowable deduction. The Tribunal directed the deletion of the disallowance, deciding the issue in favor of the assessee.

Issue 7: Disallowance of CENVAT Recoverable
The Tribunal noted that the CENVAT credits represented the cost of services availed, which was not claimed in the relevant years since they were eligible to be set off against output service tax. The Tribunal held that the write-off of CENVAT credit recoverable was allowable as revenue expenditure in the year written off. The Tribunal directed the deletion of the disallowance, deciding the issue in favor of the assessee.

Issue 8: Disallowance of Provision for Market Claims
The Tribunal noted that the assessee had not filed documentary evidence to substantiate its claim. The Tribunal held that the liability could not be said to be a present obligation without evidence. However, the Tribunal directed the revenue authorities to allow the reduction of the provision reversed in subsequent years from the taxable income. The issue was adjudicated against the assessee.

Issue 9: Claim of Surcharge and Education Cess
The Tribunal admitted the additional ground for adjudication but dismissed it, holding that education cess falls within the scope of amounts not allowed as deduction u/s 40(a)(ii) of the Act, following the decision of the Hon'ble Apex Court in the case of K. Srinivasan.

Issue 10: Adjustment on Account of Interest on Receivables
The Tribunal noted that the TPO had treated the delayed receipts of payments for receivables beyond 60 days as international transactions. The Tribunal, following the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd., held that the receivables could not be automatically characterized as international transactions. The Tribunal restored the issue back to the TPO for determination in accordance with law, allowing the issue for statistical purposes.

Issue 11: Transfer Pricing Adjustment in Relation to Export of Goods
The Tribunal noted that the assessee's contention regarding the end purpose of the transaction being philanthropic was not relevant. The Tribunal directed the TPO to reconsider the exclusion of certain comparables from the list of comparables selected by the TPO, passing a speaking order detailing the reasons for rejecting the comparables. The issue was allowed for statistical purposes.